Have not bought any Noble. I got some for my mom a couple of years ago, bought all the way down for an average price of $30, so no longer looking too smart.
An interesting crosspost about BP with some probablilities:
Would you consider a dividend cut a buy signal for BP?
Three possible answers.
(1)
I think it comes down to a rational evaluation of risk/reward setting
a price target, not picking a news item as trigger.
The buy signal is if the price is lower than the fair price given the risk
and requiring a comfortable margin of safety.
Obviously we are looking at a tail-risk situation.
The US government could seize all of BP's assets, with or without justification.
I don't think this is likely, but it's a risk. If you're a one-stock
portfolio sort of person, this risk is unacceptable.
However, if you have a passably diverse portfolio and look at
probability-weighted outcomes, you might come up with something like this:
(numbers plucked out of thin air)
- 1% chance of wipeout, say worth $0
- 4% chance very severe haircut (takeover etc), say worth $10
- 30% chance of wounded firm---healthy enough but at a new lower plateau size, say worth $35
- 65% chance of gradual return to relative normalcy after a big one-time expense hit, say worth $55
That table gives a probability-weighted value of $46.65.
That's 42% above today's price of $32.85, which is a fair margin of safety ignoring tail risk.
So, in that sense today's price is a sufficient buy signal.
i.e., if you don't mind taking on tail risk as long as it's in the price---
if you did this 100 times you'd probably be around 40% richer.
(2)
As for the dividend cut as a signal, there is no doubt that there will
be a price gyration of some sort after the July board meeting. Many
outcomes are possible, and many market reactions to each. I can't think
of any way of predicting them.
More practically, the better buy signal is when the well is definitively capped.
From that point on, the nature of the consequences are still unknown
but at least the spill's extent is fixed, removing a whole layer of uncertainty.
I suspect that the price can't recover in a lasting way until some
serious amount of uncertainty is removed.
(3)
Here's some math for you:
Let's start with the following facts and assumptions:
There are 3.13bn shares outstanding.
They have an overall tax rate around 35%.
Therefore, a one time expense of $4.82 billion is an after tax $1 hit to the earnings of each share.
Before the explosion, BP was making money at a rate of a pinch over $6/share/year.
This is a firm that should normally trade at around 10 times earnings.
No matter how big the expense is for the spill, it won't all happen at once, it will be somewhat spread over time.
So, a spill-related expense of $4.82 billion per year forever would drop EPS to about $5 and fair price to about $50.
Since the expense is probably going to be lower than "$4.82bn/year forever", the fair price is probably higher than $50.
By the same reasoning, double that cleanup expense at $9.82bn/year forever implies a fair price of about ($6 - $2) * 10 = $40.
Flipped around, today's closing price of $32.78 implies that a perpetual
cleanup expense of ($6 - $32.71/10)*$4.81bn = $13.1bn/year forever is built into the price.
By rights, the expense should not last forever.
A fixed one-time cleanup expense of $9.82bn/year total, all in one year, implies a fair price of about $6 x 10 - $2 = $58.
Based on the available information, logic, law, and contracts that's not a bad assumption.
But given that this has moved well into the confiscatory realm of politics,
posturing, pilfering and plaintiffs, the perpetual expense approaches are probably safer!
(this is a very crude back-of-the-envelope valuation, but a useful starting point) |
